How to Invest in Real Estate

HOW TO GET STARTED

Buying property can seem like an intimidating process. It’s often the biggest purchase a person will make in their lifetime. Here’s a checklist of how to approach investing in overseas property.

1. DECIDE WHAT KIND OF INVESTOR YOU ARE

Most property owners only ever buy real estate in their home country. It’s the place they understand the best, and the information they need to make good choices is generally at their fingertips. But overseas property investments can provide stronger returns if your home market is in a lull, and offer good diversification if you already own property at home.

Be realistic about the amount of risk you’re willing to take on. Overseas markets run the gamut from dependable but slower-moving first-world economies to high-risk, high-reward frontier markets. Are you looking for steady income, or the chance of doubling your money in a few years? Decide on a strategy that suits your overall financial picture and tolerance for risk.

Don’t take unnecessary currency risks. A property purchase should not be selected as a bet on currencies – make your decision based on the potential of the property and the market it is in.

2. UNDERSTAND THE MARKET YOU TARGET

Gather as much information as you can on the market you are targeting. Even if an apartment looks like good value, you should turn it down if the economic growth potential of the country, its demographics, and the legal and tax systems don’t stack up positively compared with other markets.

Take a top-down approach, starting with the macroeconomic conditions of a country – you’ve got to believe in the market where you’re about to invest. Besides gross domestic product growth, it’s worth looking at other “macro” data such as urbanization rates and the composition of the economy.

Are people moving into cities, creating demand for housing? Is the economy shifting from agriculture to manufacturing, or manufacturing to services? Is foreign direct investment growing, showing overseas interest in the target market?

3. REMOVE YOURSELF FROM THE EQUATION

Unless you are planning on using the property yourself, it’s vital to view your investments dispassionately. At all costs, avoid the approach of “I like this property,” or “I don’t like that.” Remember that the home will likely be inhabited by local people and sold on to local buyers. Try not to get emotionally involved in the deal.

For investment property, it’s vital to buy it because it makes financial sense. Make a rational assessment of the prospects for your investment property, and why you are buying it. Look at the potential for the market, and then look for opportunity and value within that market. Do not compare your target property with what you would expect to buy in your home market, or to the kind of property you would like to call home.

4. GET A GRASP OF THE LOCAL LAWS

Understand the political and legal situation in the market you are considering. Even countries that are growing fast economically will struggle to see property prices rise if the government is corrupt, unstable or ineffectual.

Many nations also restrict the kind of property that foreign buyers can buy. Although foreigners may “skirt” those real estate laws through legal loopholes, IP Global believes that is inadvisable. Seek out freehold property if possible, which will be much more liquid when you need to sell. But that is not possible in many nations. If you have to buy leasehold property, understand the length of the contracts and make sure the property is held above board.

Financing is also a key consideration. It is a good idea to borrow locally if possible, whether through a domestic or international bank, which will help match any rental income with mortgage payments.

5. AFFORDABILITY IS A KEY CONSIDERATION

Investors often get carried away comparing how cheap or expensive a property is with real estate in their home market. It is more important to understand how local home prices stack up to average incomes in that market.

In emerging markets, it’s important to compare property prices to the right segment of the population – pricing a mid-range apartment against the income of a middle-class household. The property you are buying needs to be affordable for a reasonable proportion of the local population.

6. LIQUIDITY IS ALSO IMPORTANT TO ASSESS

How easy is it going to be to sell your property when you decide to exit your investment? In developed markets such as Hong Kong and Singapore, it’s generally very easy to sell. Emerging nations may not have much of an established secondary-sales market for property at all. But is it developing?

It’s important to pick real estate with strong resale demand. Properties in city centres should remain particularly popular, and therefore more liquid, so focus on such sought-after locations. Resort and holiday properties may prove hard to sell because there is often little or no owner-occupier demand.

7. CALCULATE THE RENTAL YIELD

Make sure you know the real rental value of a potential property, by checking on comparable rents for similar units on the market. Understand the average long-term property yield for the market, where average yields are now, and the yield on the property you are considering.

Mature, liquid markets will generally produce much lower yields, while riskier markets should command higher yields to compensate for the potential for things to go wrong or for longer sales periods. Are you being rewarded sufficiently?
At its simplest, the yield is the rent as a percentage of the purchase price. But it’s also important to work out the real net rent for a project, factoring in all management fees and other costs.

8. FACTOR IN TAX AND TRANSACTION COSTS ON INVESTMENT RETURNS

Taxes can eat away at your rental income while you own a property, and they can gobble large amounts of your capital gain when it comes time to sell. Check the current tax laws in the market you are targeting and factor them into any investment case you are making.

In many countries, the capital-gains tax decreases after a certain number of years, which may help determine how long you plan to hold a property. You should also check whether you will be taxed on rental and property income in your home market that you receive from overseas.

It is also important to look at the cost of buying into and selling out of property. Is there a stamp duty or sales tax, who pays it, and how large is it? What are the fees for agents and lawyers? What are the total roundtrip transaction costs, to buy and then sell a property?

9. UNDERSTAND THE OWNERSHIP AND FINANCIAL STRUCTURE

Make sure you understand exactly what you are getting into financially. When will payments come due, and how large will they be? In an off-plan sale, you’ll typically pay a deposit and then have staggered payments up to, say, 20% to 30% of the cost of the apartment. The balance is due on completion.

Escrow accounts are comparatively unusual in Asia, but are becoming more common. Placing money into escrow will protect you in the event of a development going bad.

Also make sure you know how the property will be held, and the structure of any company set up to own the development. Will you own land and the home, as in freehold property? How long is the leasehold?

10. DO YOUR DUE DILIGENCE ON THE DEAL

The biggest and most-obvious risk for off-plan deals is that the developer fails to complete the project. So it is important to examine the track record of the developer. Have they completed similar projects in the past? It may be worth paying more for a unit with an established developer, particularly if their apartments appreciate quicker than their competitors.

It’s also key to assess the level of service you’ll have on completion. The larger your property portfolio, the less hands-on you’ll likely want to be.

What kind of building or property management will be in place once the property is built? Are there good letting agents to help you rent the property where you will be buying? Ask how many properties they manage. It is worth paying more for a company with a bigger portfolio and a larger client roster. Vacancy rates can be higher for new developments, so it is important to find a company that can rent out the unit quickly.

Disclaimer

The viewpoints and opinions expressed do not take into account any particular individual's investment objectives, financial situation, political agendas or religious beliefs. My views shared are my own which are derived from my personal experiences and influences and I am free to change them at any time, or realign to accommodate any new conditions and information available. I cannot guarantee the information to be free of mistakes and incorrect interpretations. Any financial topics must not be taken as advice and past performance is not indicative of future results. The information, including commentary, investment ideas, legal, tax and other specialised subjects, should not be relied upon as a substitute for independent professional consultation, which should always be explored before making any financial or legal decisions.